- Republicans ready to extend the federal debt limit by three months.
- Slightly stronger JPY as Bank of Japan starts its two-day meeting where aggressive measures to weaken the yen further are expected.
On Friday, House Republican leaders proposed to extend the federal debt limit by three months. The proposal is expected to go before the House this week. It includes the requirement that the House and the Senate formally pass the budget by mid-April but, importantly, it does not include specific spending cuts. Political commentators see this as a significant shift in the Republican strategy and it should further reduce uncertainty in financial markets even though it looks like yet another temporary fix. According to the Wall Street Journal, the White House is ‘encouraged that there are signs that Republicans may back off their insistence on holding the economy hostage’.
US stock markets closed mixed on Friday but the underlying sentiment was still positive after a strong weekly performance. Markets easily shrugged off a weaker-than-expected Michigan consumer confidence as a possible compromise on the US debt ceiling moved closer. Dow Jones ended up 0.39%, S&P500 gained 0.34% and Nasdaq fell a modest 0.04% as a disappointing earnings report from Intel weighed on tech stocks.
On Friday, the European fixed income market saw very high intraday volatility as markets are trying to figure out the impact of the upcoming LTRO repayments – the first results will be published on Friday. During the week EONIA rates had been pushed higher but as ECB’s Coeuré said on Friday that he does not expect the repayments to affect EONIA rates, the effect was a relatively strong move lower in euro rates, mitigating a part of the move higher in rates seen earlier in the week. The LTRO repayments will be the number one theme this week in the European fixed income market. US Treasury yields also ended the day lower but the discussion about the Fed’s QE exit might continue the coming weeks. On Sunday, Fed Richmond president Lacker said that the Fed should stop printing money as soon as possible. Note that Lacker is well known for his opposition to the current open ended easing.
In the FX markets, all eyes are on the two-day Bank of Japan (BoJ) meeting that started today. The yen has rebounded slightly overnight – as Nikkei is in negative territory - from its lowest level since the summer of 2010 and USD/JPY is once again below 90. Overnight Hamda, economic adviser to Prime Minister Abe, said that if yen weakness goes too far, it should be stopped. Hamada has earlier said that USD/JPY at 100 is fine, whereas 110 could be problematic. Note that Hamada is viewed as a very strong advocate of easier monetary policy in Japan. As we write in Weekly Focus, 18 January, we firmly expect BoJ to deliver easing measures this week and we continue to see clear upside for EUR/JPY and USD/JPY.
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